6 Types of investments that let you achieve financial freedom

For anyone, financial planning (or the lack of it) can be the difference between financial freedom and financial stress. Many people either don't prioritize investing or invest in inappropriate investments that don't match their risk profiles or financial goals. Eventually, it leads to financial stress for them. In this article, we will focus on six types of investment products that can help you reduce financial stress and enjoy financial freedom.

1. Emergency fund

It would help if you started your financial journey by building and maintaining an emergency fund as it is among the easiest investments to make. The pandemic has impacted most individuals. Many salaried individuals lost their jobs, entrepreneurs closed their businesses, and self-employed people were forced to wind up. During such times, an emergency fund can help you tide over financial stress caused by income loss. Events like the COVID-19 pandemic highlight the importance of an emergency fund. Hence, it is also one of the most important investment products to start financial planning.

An emergency fund should equal 9-12 months' worth of monthly expenses. You can build an emergency fund by setting aside monthly money in a dedicated Savings Account. You can use the IDFC FIRST Bank Savings Account to build and maintain your emergency fund. It comes with best-in-class features – interest rates as high as 7% p.a., monthly interest credit, paperless digital account opening in minutes, etc. You can also enjoy account advantages such as higher POS limits, free and unlimited ATM transactions, etc.

2. Life and health insurance

Prioritise life and health insurance after you have sorted out the emergency fund. You can take care of all the financial liabilities (loans) and responsibilities you have while you are around, including paying for your spouse's retirement, your child's higher education, etc. You need to plan before investing towards your financial goals to ensure that your family has financial backup in the event that you are absent. Life insurance is one of the most important types of investments. The cost of a term life insurance policy can be lower than that of a permanent life insurance policy.

You should also purchase health insurance for your entire family. Consider a family-floater policy, which will cover medical expenses in the event that someone in your family becomes hospitalized. 

3. Debt repayment as a type of investment

It’s important to pay off any high-cost debts, such as credit card debt or personal loans, on priority. Having outstanding debt can cause financial stress. However, not every debt is bad. You can convert high-cost credit card debt into easy-on-your-pocket EMIs by using a loan to purchase a house that may appreciate over time or a vehicle that offers convenience.

A loan foreclosure may involve certain charges. Make sure you check this with your lender. A debt repayment program can involve partial prepayment or foreclosure. You can use the accumulated amount for repayment. For debt repayment, you may consider a variety of strategies, such as repaying the debt with the highest interest rate first or the one with the lowest amount first.

4. Fixed deposits
 

Once you have a debt repayment strategy, you may shift your focus towards investing for your financial goals. It would help if you made a proper investment plan taking into account your financial goals, risk profile, investment time horizon, types of investment products that suit your risk profile, asset allocation, etc. Follow appropriate asset allocation, which involves diversifying your portfolio among various investment instruments, such as equity, fixed income, gold, etc. Within the fixed-income category, fixed deposits are one of the best types of investment products considering the high-interest rate regime that we are currently in.

Fixed deposits are investments that give you a fixed return on your investment over a specified period. A safe investment product, it's at multi-year highs in the first quarter of 2023 and may continue to rise in the future. Fixed-income investors should take advantage of these high returns in the near future. The IDFC FIRST Bank Fixed Deposit offers competitive interest rates of up to 8.00% p.a. Senior citizens receive an additional interest rate of 0.50% p.a. You can choose either a monthly or quarterly interest payout option, and you can take advantage of an overdraft against the security of the fixed deposit for short-term liquidity needs.

5. Index funds
 

Due to the increasing efficiency of stock markets, active fund managers have faced challenges beating their respective benchmark indices in the last few years. Specifically, many large-cap active funds have underperformed their benchmark indices. Consequently, index funds have become a popular type of investment product for investing in equity markets. In proportion to their weightage, index funds invest in all of the benchmark index constituents.

An index fund aims to duplicate the performance of a benchmark index and generate similar returns. It typically has a lower expense ratio than an active fund.

Index funds are available on various broad market diversified indices such as:

·     Nifty 50

·     Nifty Next 50

·     Nifty 100

·     Nifty Midcap 150

·     Nifty Smallcap 250

6. Retirement planning
 

With increasing life expectancy and the lack of employer-funded pension plans, everyone needs to build their retirement fund as a priority investment. You should start investing towards your retirement plan as soon as you start working. You can invest in various types of investment products, such as equity mutual funds, the Public Provident Fund (PPF), or hybrid products (a combination of equity and fixed-income) to build a retirement fund.

Annuity plans are one of the best investment products for retirement planning. In an annuity plan, an insurance company offers an investor a series of payments at a specified frequency against a specified premium. It provides ample flexibility:

·     The premium contribution can be a lump sum or regular payments

·     The payouts can be immediate or deferred

·     The duration of the payouts can be for a fixed period or a lifetime

·     It can be a single or joint annuity

You will be well prepared for your golden years when you begin investing in the right type of investment products with the appropriate amount at the right time (ideally as soon as you begin earning).

Conclusion

Investing wisely begins with building and maintaining an emergency fund. Next, buy life insurance for yourself and health insurance for your entire family. You must have a debt repayment plan if you have high debt or high interest costs. Invest in a diversified portfolio with a variety of investment products such as fixed deposits and index funds if you want to achieve financial goals. Give priority to retirement planning among your financial goals.

One of the best ways to eliminate financial stress and enjoy financial freedom is to take a holistic approach to financial planning.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.